The commercialisation of coal blocks will benefit the economy

Rouhin Deb | Updated on October 19, 2020 Published on October 19, 2020

The auctioning of coal blocks, mostly located in backward States, will not only bring in much-needed revenue and FDI but also boost the production of coal

As the government of India receives 76 bids for 23 coal mines against the 38 up on auction, what does this commercialisation of coal block allocation mean for the country’s economy going ahead? The fundamental shift towards unbridling the coal and mining sector is significant for various reasons.

This has been hailed as a landmark move by the government towards changing the energy landscape of the country, making it self-sufficient in coal production. The government has already made claims such as commercial coal mining will end the 70 years of policy hurdles in the sector, taking India one step closer to the goal of a “Self-reliant India”.

But what exactly are the changes that this policy reform is about to bring? And how exactly is this reform going to benefit the economy?

Social aspect

The commercial coal mine auction is an attempt to attract private investment into the coal mining sector. The government has since made amendments to the Mineral Laws Ordinance, 2020 which aims at changing the focus of the government from revenue maximisation to maximum production in the sector. Given the experience of the previous governments with regards to coal block allocation, the incumbent NDA government had carried out the allotment of coal block auctions in the most transparent manner since it came to power in 2014, trying to bring about a change in the sector.

However, the recent reform to commercialise the sector will bring about a change that is qualitatively different from the past reforms taken by the government. The recent commercialisation of 41 coal blocks, allowing 100 per cent FDI in the sector, will benefit the States like Chhattisgarh, Jharkhand, Madhya Pradesh, Odisha and Maharashtra. These coal blocks, which will come up for bidding in the next two months, are situated in some of the most backward districts of the country.

The allocation of these blocks will bring in an estimated ₹33,000 crore of investment to these districts in the next 5-6 years. This investment will lead to social development in the tribal belts of eastern and central India as it will cater to various avenues of growth in the tribal areas. The coal block auctioning is estimated to create 2.8 lakh jobs in these belts.

The auctioning will also generate a revenue of around ₹20,000 crore a year for the coal-bearing States as royalty. The additional fiscal capacity can be used to spur growth and social development in these States.

As far as the environmentalists are concerned, where there might be concerns regarding over-exploitation of the resources, the country has already committed to obligations of meeting the international conventions on climate change challenges. Stringent environmental norms have been put in place in coordination with the Ministry of Environment and Forest with regards to adhering to the set rules.

The Ministry of Coal recently started a separate cell to ensure coal companies and coal mine owners abide by the standard environmental norms. The government is also ensuring dead coal mines are recreated into green zones by restoring the water bodies and existing land.

Commercial aspect

India today imports around 247 million tonnes of coal from countries like Indonesia, South Africa, Malaysia and Australia, spending around ₹1.58 lakh crore of foreign exchange reserves. The present allocation of 41 blocks will give production a boost by adding 225 million tonnes of coal to the existing 750 million tonnes capacity, an incremental increase of about 15 per cent. This additional coal produced will benefit most of the basic industries in the country.

Industries like steel, power, cement and sponge iron, which till now were importing coal, will be able to participate and buy coal locally at a much lower cost reducing, thereby, their cost of production. This will in turn result in the end-products coming out of these industries becoming cheaper and globally competitive. Additionally, the increased production will also lead to huge savings in foreign exchange which could be used for various other developmental purposes.

Previously, the coal block offers from the government were restricted to certain sectors like public sector units (PSUs). However, with the recent reform, the government has completely opened the sector by deregulating the use and price of coal. The coal market has now been fully thrown open to competition, capital, participation and technology.

The government has made its intentions clear by stating that the sector is set to witness a lot of technological changes in production and sampling of coal. Technology will be also be widely used by the government to track the timely payment of royalty and verification. As the private players join the sector, they are set to bring standard management practices, a lot of new technologies and efficiency into the industry. A lot of structural change can also be witnessed in the public sector to remain in competition with the private players, which will eventually benefit the whole industry.

Private sector participation

Allowing the private sector for the first time to mine coal will bring in a lot of transparency in the sector. The additional production of coal will also enable the government to create a national coal index based on the weighted average of various combinations of monthly prices of coal across various channels of transaction. This will also help establish an actual and fair price for coal in the open market, which was absent till recently.

Also, contrary to the general anticipation of reduced participation of bidders amid the Covid-19 crisis, the government has seen unusually high interest in the coal block allocation. According to government sources, 1,140 potential investors across India and abroad have shown interest in bidding for the blocks.

This could be because most of the prospective investors are long-term investors already in the business of coal or allied sectors and the Covid crisis seems temporary. The reform seems in the right direction in paper but are they enough to woo the private investors into the sector? To address this question, we will have to see how the bidding goes over the next two months.

The writer, a development economist, is with Strategic Investment Research Unit, Ministry of Commerce and Industry.

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Published on October 19, 2020
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